The Eternal Second Act
Thomas L. Venable, chairman of Spectrum Control Inc., is talking about technology companies, but the subject could be any rapidly growing business.
"It's amazing, isn't it?" he says. "They double in size, then double, and double again. And then they disappear." Such companies get so caught up pushing product out of the door, claims Venable, that they're totally unprepared for the moment when demand slackens or a better mouse-trap comes along. As he says, it happens all the time.
In fact, it happens so frequently that Venable, an electrical engineer by training, has reduced the problem to one complicated graph (see box below). But the sketch, says Venable, does more than just allow him to chart companies destined to be victims of success. It also lets him predict -- with amazing accuracy -- when his company, or any company, should start working toward the introduction of a new product.
It isn't as mystical as it sounds. While the graph may look complex, the thought behind it is simple: nothing lasts forever. At some point your wonderful product or service is going to be obsolete, "and if you are not developing something new, early in the current product's life cycle, you're living on borrowed time," says Venable. "If you wait until your line is mature, you're dead."
In other words, Venable takes the concept of product life cycles -- an idea that has been around forever -- and uses it as the cornerstone of his company's marketing strategy. Every decision about adding a new product is made with the understanding that eventually it will have to be replaced. Even as they start to work on the initial product, employees are thinking about its next generation.
Here's how the process works. Spectrum Control, in Erie, Pa., is in the business of making sure technology-based business products can work side by side without interfering with one another. To oversimplify, a Spectrum "filter" might prevent your garage-door opener from turning on the microwave.
In this $130-million industry, it is inevitable that a filter that's good enough today will be bettered tomorrow. Somebody is going to come up with a product that is smaller, more effective, and even less expensive. If Spectrum is to survive -- and hold onto its 25% market share -- that somebody had better be Spectrum. But when do you start working on a second-generation filter? Equally important, when do you introduce it?
The answer to the first question is simple. Every product has a predictable life cycle -- the appeal of most products, says Venable, citing research done at Massachusetts Institute of Technology, lasts 10 to 14 years. At some time 2 to 3 years before maturity you will want to have someone turning out prototypes of the sequel. That way, when demand starts to fall, you can pop out your new product and start the cycle over again.
Now all that is nice in theory -- and the graph sure is pretty -- but just how do you accomplish it? How can you work on a second generation when the phone is ringing off the hook with demand for the first? Who exactly is going to do that development work? And oh yes, in the midst of all the excitement over product one, how do you get folks even to think about product number two?
All good questions, says Venable with a smile. And then he starts talking about his graph again.
The reason he's taken the time to sketch it out, he says, is that he wants everyone in the company to know that trees don't grow to the sky. "The hardest thing in all this is coming up with the idea for the second product," Venable says. "But the second-hardest thing is to get people to accept the idea of life cycles, and to get them thinking about the need to replace the existing line. They're too busy concentrating on getting the product out."
So to get people thinking beyond the current sale, employees are constantly exposed to the idea of market planning. Venable has created a series of training tapes on the subject, and Spectrum's managers talk about it all the time. "Different employees have different levels of understanding about this," Venable concedes. "But I think everyone knows that our products won't be hot forever, and that they have to be thinking of new ones."
But what is going to be doing that thinking? The last thing a manager in charge of a hot product -- a product he sees as his ticket up the corporate ladder -- wants to believe is that some day the good times will end. How do you get that manager to commit seriously to the idea of working on something that might put him -- or at least his product -- out of business?
You don't, Venable says. For the most part, you keep operations people out of planning. "We want them out there milking the cash cows," he says. "They aren't deliberately kept out -- we welcome their ideas -- but traditionally they want nothing to do with it. They just want to move the product."
Product managers are not isolated from the process completely, however. They, like everyone else, are exposed to the company's fanatical belief in planning. Then, once a quarter, says Venable, "they are asked to participate in a series of meetings to evaluate new product ideas that have come from our scientists or management.
"We bring them into the process gradually," he adds. "If we believe a concept has merit, we may ask them to loan us one of their people to test it out. We want them to buy in on it. You have to get beyond the not-invented-here syndrome. You want these people to support the idea. They have to, if it is going to work."
The success of the process at Spectrum is apparent in two ways. From 1977 to 1986 -- when the emphasis on introducing new products was in full force -- Spectrum averaged net aftertax margins of 9.7%, compared with approximately 5% for the industry as a whole. Return on equity averaged 22.5% over that same period, and Spectrum's stock traded as high as 39 times earnings.
Last year, the first full year the company got away from the process, Spectrum barely broke even.
The downfall is directly attributable to the $30-million acquisition of SFE Technologies, a manufacturer of electronic components. Spectrum bought SFE primarily to push the company into new areas -- specifically the manufacturing of chips used in computer circuit boards -- and to gain foreign manufacturing plants and distribution.
The move, says Venable, was an aberration. His staff is already working to convert SFE's staff to Spectrum's planning process.
"The whole idea behind the process is to avoid crises," says Venable. "If you don't have a plan in place for introducing a new product, you'll have a major problem once what you are selling comes to the end of its life cycle.
"You want to be ready to go with the second product, just as the first one is about to die off."